October 17, 2008

Special Needs Trusts X

Stetson Law School hosted the 10th Annual Special Needs Trust (SNT)
Conference October 16-17, 2008 at the Don CeSar Beach Resort in St. Pete
Beach, Florida. More than 300 attorneys, trustees, care planners and
structured settlement consultants attended one or both of the basic and
advanced educational programs.

Throughout its 10 year history, the Stetson Conference has been
recognized as the leading SNT knowledge forum in the United States.
Most of the speakers are members of either the Academy of Special Needs
Planners (ASNP) or the Special Needs Alliance (SNA) and each of these
associations schedule members-only meetings in conjunction with the
Stetson Conference.

For structured settlement professionals, the Stetson program titled
"The Basics of Special Needs Trusts" offered analyses of several
important settlement planning topics and included two presentations
specifically focusing onstructured settlements:

Texas Attorney Pi-Yi Mayo spoke about the January 31, 2006
Social Security Administration (SSA) letters to attorneys Roger
Bernstein and Jay Sangerman ("Bernstein letter") as well as the
application of the Deficit Reduction Act of 2005 (DRA) to structured
settlements used to fund special needs trusts; and

In addition, Bradley Frigon ("Basics of Special Needs Trusts") and
Bernard Krooks ("Taxation of Special Needs Trusts") each addressed
structured settlement issues in their conference presentations.

Mayo's discussion about the Bernstein letter and the DRA highlighted
two controversial issues that have not received sufficient attention by
either the National Structured Settlement Trade Association (NSSTA) or
the Society of Settlement Planners (SSP). For backgound about these
issues, see these prior S2KM blog posts:

SSP 2008 Annual Meeting - 2: specifically David Lillesand's comments that the SSA letters to Bernstein and Sangerman are "inoperative" based upon his discussions with SSA officials including Ken Brown.

Citing Texas law, Mayo stated that the DRA annuity
rules do apply to structured settlements used to fund SNTs - at least
in Texas. According to Mayo, the Texas interpretations of the DRA are
especially relevant because the DRA annuity rules adopted pre-existing
Texas rules almost verbatim. Mayo warned that other states are likely
to interpret the DRA annuity rules in a similar fashion - especially
because (as other Stetson speakers confirmed): 1) state Medicaid
agencies are making a concerted effort to limit SNT uses, flexibility
and availability; and 2) many state Medicaid agencies continue to view
annuities generally as abusive SNT planning techniques.

As a counterpoint on the DRA, Mayo recommended John Campbell's 2008 NAELA Journalarticle titled "The Use of Qualified Settlement Funds, Qualified Assignments and Special Needs Trusts in Physical Injury Settlements"
in which Campbell argues that the DRA should not apply to structured
settlements used to fund a SNT because the funds used to purchase the
structured settlement annuities never belong to the SNT beneficiary.
For S2KM's review and analysis of Campbell's article, see S2KM's
earlier blog posts titled "IRC 468B Funds Revisited" featuring comments by Campbell.
As for the SSA's letters to Bernstein and Sangerman, Mayo did not
directly address whether he supported Lillesand's assertion that the
letters are "inoperative". Instead he cited the following authority to
support his opinion that: 1) payments from a structured settlement
annuity that are irrevocably assigned to a SNT are not income to the
trust beneficiary when paid directly into the trust; and 2) that such
annuity payments paid into a SNT after a beneficiary reaches age 65
should be treated the same as annuity payments received before age 65:

POMS SI 01120.201J.1D which states in part: "a legally
assignable payment ... that is assigned to a [SNT] is income for SSI
purposes unless the assignment is irrevocable"; and

CMS'
position that additions to a SNT made after the beneficiary reaches age
65 should not be treated differently from prior additions where there
has been an irrevocable assignment of structured settlement payments to
a properly established SNT.

Mayo emphasized the importance of reciting the irrevocable nature of
the structured settlement assignment in settlement documentation and
court orders establishing the SNT. He also agreedwith Lillesand about
the importance of obtaining SSA POMS that specifically address
structured settlements used to fund SNTs. For S2KM's most recent status
report about SSA POMS for structured settlements, see Ken Brown's
comments under "SSI Rules for Trust Administration" in S2KM's blog post about the 2008 ASNP Annual Meeting.

In the context of the current financial crisis, Govoni's presentation titled "An Economic Analysis of Structured Settlements"
appeared to be an important and timely subject. For this author,
however, the analysis fell short of expectations for several reasons:

Govoni was the only presenter at the conference who did not
provide handout materials. With some exceptions, in this author's
experience, structured settlement handout materials at national
conferences repeatedly fall below the highest standards of other settlement
planning professionals.

Although Govoni briefly referenced the
current financial crisis, he did not mention AIG, did not discuss financial
ratings and did not address the impact of the financial crisis on structured
settlements and/or managed assets as funding alternatives for SNTs.

Govoni
focused much of his analysis on relative rates of return and age
ratings but never mentioned after-tax investment comparisons or Monte Carlo analysis.

Govoni recommended annuity commutation riders as a strategy to
pay potential estate tax obligations but failed to mention the secondary
market as a potential source of structured settlement liquidity.

With the exception of a single reference by Mayo to "the grey market",
none of speakers who addressed structured settlements discussed the
secondary market, IRC 5891 or the 46 state structured settlement
protection statutes. This educational neglect mirrors the continuing
failure of NSSTA and SSP to educate their members about how to sell
structured settlements (and grow the structured
settlement market) in the context of IRC 5891 and the 46 state
structured settlement protection statutes.

In this author's private discussions with Stetson conference attendees, several mentioned the secondary market as a valuable
settlement planning resource. Three attendees informed this author of SNT beneficiaries and trustees who had been forced into the
secondary market almost immediately following settlement because their
SNTs had been "over-structured". In each instance, the settlement plan
contained insufficient cash to permit the SNT trustee to purchase a
needed house and/or a vehicle. In one case, the SNT beneficiary and his
family have brought a lawsuit against the plaintiff attorney. These
attendees each said the over-structuring resulted from defense pressure
during settlement negotiations and could have been avoided if a 468B
Qualified Settlement Fund had been utilized.

While it was encouraging to see leaders from both NSSTA and SSP attend
the Stetson SNT seminar, more educational interaction and legislative
collaboration is needed between the structured settlement industry
(both the primary and secondary markets) and related professional
associations including special needs planners and Medicare set-aide
professionals. As NSSTA and the National Association of Settlement
Planners (NASP) prepare for their association meetings next week in San
Francisco and Las Vegas respectively, such increased interaction and
collaboration should represent priorities and opportunities to improve
and grow the structured settlement market.

Congratulations to Stetson Law School for continuing its SNT
educational leadership and also for focusing increased attention on
structured settlement issues that impact SNTs and special needs
planning.